As May Grads Exit Their Grace Period, NASFAA Provides Tips on Selecting a Repayment Plan

Nov. 15, 2012, Washington, DC -- It’s fall, and as recent college graduates unpack their scarves and fuzzy sweaters, they should also begin thinking about student loan repayment.

“As May graduates approach the end of their six-month grace period on federal Stafford loans, now is the time to begin thinking about how they will manage loan payments when the bills come due,” said Justin Draeger, president of the National Association of Student Financial Aid Administrators (NASFAA). “Determining the best repayment strategy for you and your family is absolutely critical, because no one benefits from student loan default—not schools, not lenders, not taxpayers, and most certainly not students, who could suffer the negative effects of that credit damage for years to come.”

The Standard Repayment Plan breaks down your loan balance into monthly payments of at least $50 for up to 10 years. In general, this is the plan that will cost you the least amount of money in interest payments.

The Graduated Repayment Plan starts monthly interest payments at a lower amount, which gradually increase for up to 10 years. This plan is best for borrowers whose income may start out low but is expected to increase—but note that you will pay more in interest over time than if you selected Standard Repayment.

The Extended Repayment Plan allows borrowers to extend the repayment period from 10 years to up to 25 years; however, they will end up paying more in interest. This plan works best for borrowers whose loan burden is too large to bear the standard monthly payments over the course of just 10 years.

The Income-Based Repayment (IBR) Plan allows borrowers with a demonstrated financial hardship to limit their monthly loan payments, excluding parental PLUS loans, to 15 percent of their discretionary income (that is, the difference between their adjusted gross income and 150 percent of the poverty guideline for their individual situation). Under this plan, if the balance of the loan has not yet been paid off after 25 years, it can be forgiven. In most cases, borrowers will pay more in interest over the life of the loan. This plan is best for borrowers whose financial situation is unstable or is insufficient to bear the monthly payments under other repayment plans.

The Income-Contingent Repayment Plan takes into consideration annual income and family size as well as the total loan amounts. If a loan balance remains after 25 years, it may be forgiven. Unlike the IBR Plan, borrowers need not be facing financial hardship to qualify. However, they will likely pay more in interest than in other repayment plans. This plan is best for borrowers who are not facing demonstrated financial hardship, but whose financial situation is insufficient to bear the monthly payments under other repayment plans.

The Income-Sensitive Repayment Plan allows borrowers to pay a monthly loan amount that takes annual income into consideration. The length of the repayment period is up to 10 years, and the balance is not forgiven at the end. Like other plans, borrowers will pay more in interest over the life of the loan. This plan is best for borrowers whose financial situation may fluctuate over the course of the repayment period.

Source: U.S. Department of Education

It’s important to remember that these repayment options only apply to federal loans. If you have private or alternative loans—nonfederal loans made by a lender such as a bank, credit union, state agency, or a school—be sure to check with your lender about the terms of your repayment.

Private loans are not eligible for IBR or the other federal loan payment plans, deferments, forbearances, or forgiveness programs. However, the lender may offer some type of forbearance or payment relief. Read your private loan paperwork carefully and then talk to the lender about what repayment options they may offer.

If you aren’t sure how you’ll make any loan payment at all, don’t panic.

“Federal student loans are structured to include many borrower-friendly features. If you're unable to make payments because of medical issues, unemployment, or other financial challenges, there are legitimate ways to temporarily postpone your federal loan payments, such as deferments and forbearance,” said Draeger. “Just beware: in some cases interest still accrues, so you may want to consider making interest-only payments if you are able.”

For more information on planning and paying for college, visit the “Students, Parents, and Counselors” section of www.studentaid.org.

About NASFAA

The National Association of Student Financial Aid Administrators (NASFAA) is a nonprofit membership organization that represents approximately 20,000 financial aid professionals at 3,000 colleges, universities, and career schools across the country. Each year, financial aid professionals help more than 16 million students receive funding for postsecondary education. Based in Washington, D.C., NASFAA is the only national association with a primary focus on student aid legislation, regulatory analysis, and training for financial aid administrators. For more information, visit www.nasfaa.org.